MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATIONSTRATEGIC MANAGEMENT ACCOUNTINGERP, MRP & MRP II

INTRODUCTION

ENTERPRISE RESOURCES PLANNING (ERP)DEFINITIONAccording to Webopedia.com, Enterprise resource planning (ERP) isbusiness process management software that allows an organization to use a system ofintegratedapplications to manage the business and automate manyback officefunctions related to technology, services and human resources.ERP software integrates all facets of an operation, including product planning, development, manufacturing, sales and marketing.ERP software is considered anenterprise applicationas it is designed to be used by larger businesses and often requires dedicated teams to customize and analyze the data and to handle upgrades and deployment. In contrast,Small business ERP applications are lightweight business management software solutions, customized for the business industry you work in.

Figure 1 Concept of Enterprise Resource Planning (ERP)

Other than that, Managerial Accounting book, Crosson Needles, 8th Edition defined that ERP is the systems combine the management of all major business activities with support activities to form one easy-to-access, centralized data warehouse.EVOLUTION OF ENTERPRISE RESOURCE PLANNING (ERP)ERP (Enterprise Resource Planning) is the evolution of Manufacturing Requirements Planning (MRP) II.From business perspective, ERP has expanded from coordination of manufacturing processes to the integration of enterprise-wide backend processes. From technological aspect, ERP has evolved from legacy implementation to more flexible tiered client-server architecture.Figure 2 Evolution of ERP

The following table summarizes the evolution of ERP from 1960s to 1990s.TimelineSystemDescription

1960sInventory Management & ControlThe combination of information technology and business processes of maintaining the appropriate level of stock in a warehouse. The activities include identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status.

1970sMaterial Requirement Planning (MRP)MRP utilizes software applications for scheduling production processes. MRP generates schedules for the operations and raw material purchases based on the production requirements of finished goods, the structure of the production system, the current inventories levels and the lot sizing procedure for each operation.

1980sManufacturing Requirements Planning (MRP II)MRP II utilizes software applications for coordinating manufacturing processes, from product planning, parts purchasing, inventory control to product distribution.

1990sEnterprise Resource Planning (ERP)ERP uses multi-module application software for improving the performance of the internal business processes.

ADVANTAGES AND DISADVANTAGES OF ERPEnterprise Resource Planning (ERP) softwareis considered as one of the complete business software in todays competitive environment. AnERPsolution allows you to have an integrated view of all your Business Processesand other sub-processes which further allows efficiency and effectiveness in achieving your business goals.ADVANTAGESDISADVANTAGES

1. Better organizational control, especially in large companies, where the volume of information is more than in a small company.2. Duplication of information is avoided.3. Improved communication, both internally and externally.4. Company profitability analysis can be carried out to analyse where costs are higher and where there are more sales.5. Improved decision-making process within the company.6. The company is able to react better to any unforeseen problem or situation.7. Better use of time.

1. The high cost of implementation and maintenance. (High initial investment)2. Adaptation to the hardware in the company.3. It is necessary to train all employees in the company so that the system is used efficiently. This is a cost for the company as well as the time and effort needed for it.4. Integration with other applications in the enterprise needed.5. Inflexibility of the system, because this is a generic system.6. There are few experts in this system.7. If the system is not applied correctly,it can be very detrimental to the company.

MATERIAL REQUIREMENT PLANNING (MRP)Success of an operation department of any organization is dependent upon an efficient production plan. One of the key essential of a production plan is material and manufacturing planning system. Material requirement planning plays a pivotal role in assembly-line production. Material requirement planning is a system based approach, which organizes all required production material.

DEFINITIONMaterial requirement planning is an information system for production planning based on inventory management. The basic components of material planning are: Material planning provides information that all the required raw material and products are available for production. Material planning ensures that inventory levels are maintained at its minimum levels. But also ensures that material and product are available whenever production is scheduled, therefore, helping in matching demand and supply. Material planning provides information of production planning and scheduling but also provides information around dispatch and stockin

HOW DOES MRP WORKSMRP works backward from a production plan for finished goods to develop requirements for components and raw materials. MRP begins with a schedule for finished goods that is converted into a schedule of requirements for the subassemblies, the component parts, and the raw materials needed to produce the final product within the established schedule. MRP is designed to answer three questions:whatis needed?how muchis needed? andwhenis it needed?" MRP INPUTThe information input into MRP systems comes from three main sources:The bill of materials is a listing of all the raw materials, component parts, subassemblies, and assemblies required to produce one unit of a specific finished product. MRP uses the bill of materials to determine the quantity of each component that is needed to produce a certain number of finished products. From this quantity, the system subtracts the quantity of that item already in inventory to determine order requirements. The master schedule outlines the anticipated production activities of the plant. Developed using both internal forecasts and external orders, it states the quantity of each product that will be manufactured and the time frame in which they will be needed. The schedule must cover a time frame long enough to produce the final product. The inventory records file provides an accounting of how much inventory is already on hand or on order, and thus should be subtracted from the material requirements. The inventory records file is used to track information on the status of each item by time period. This includes gross requirements, scheduled receipts, and the expected amount on hand.

MRP PROCESSINGUsing information from MRP input, MRP system determines the net requirements for raw materials, component parts, and subassemblies for each period on the planning horizon. MRP processing first determines gross material requirements, then subtracts out the inventory on hand and adds back in the safety stock in order to compute the net requirements.

MRP OUTPUTThe main outputs from MRP include three primary reports and three secondary reports. The primary reports consist of: planned order schedules, which outline the quantity and timing of future material orders; order releases, which authorize orders to be made; and changes to planned orders, which might include cancellations or revisions of the quantity or time frame. The secondary reports generated by MRP include: performance control reports, which are used to track problems like missed delivery dates and stock outs in order to evaluate system performance; planning reports, which can be used in forecasting future inventory requirements; and exception reports, which call managers' attention to major problems like late orders or excessive scrap rates.

ADVANTAGES AND DISADVANTAGES OF MRPAs with every system based process, material resource planning also has its advantages and disadvantages, and they are as follows:Advantages of Material Resource Planning It helps in maintain minimum inventory levels. With minimum inventory levels, material planning also reduces associated costs. Material tracking becomes easy and ensures that economic order quantity is achieved for all lot orders. Material planning smoothens capacity utilization and allocates correct time to products as per demand forecast.Material planning not only benefits operation department but is also beneficial to the other department of organization. They are as follows: Material planning is useful in determining cash flow requirement based on material requirements and final dispatch schedules. It helps procurement team in scheduling purchase of necessary material. It helps the sales team in determining delivery dates for final products.

Disadvantages of Material Resource Planning Material planning is highly dependent on inputs it receives from other systems or department. If input information is not correct than output for material planning will also be incorrect. Material planning requires maintenance of robust database with all information pertaining inventory records, production schedule, etc. without which output again would be incorrect. Material planning system requires proper training for end users, as to get maximum out of the system. Material resource planning system requires substantial investment of time and capital.

MANUFACTURING RESOURCE PLANNING (MRP II)CONCEPTMRP II is manufacturing resource planning. MRP II includes software for many areas of manufacturing companies including purchasing, inventory, material requirements planning, shop floor scheduling, capacity plannning, customer order entry and accounting. Advantages are standardization and automation of business processes leading to improvements in cost control and revenue.ADVANTAGES OF MRP IIThe MRP II is a useful tool, the main function of which is to standardize all the business processes through providing automated methods for various business segments. Standardization leads to the processes that are easily repeated as well as a platform that gives an opportunity to improve all those processes. The point is that the organization that successfully implements MRP II for the first time faces with a range of troubles regarding controlling the process of controlling the increase in transactions in purchasing, manufacturing and selling associated with growth. Besides, the MRP II systems provide the employees with an opportunity to do more and, as a result, to have a clearer visibility of information for their businesses. All the advancements in the way all the work is performed enable the company to become more competitive.

DISADVANTAGES OF MRP IIWhen it comes to the disadvantages of the MRP II, one should mention the fact that the implementation of the MRP II systems requires information to be accurate. In case poor quantity info is applied either in the bill of material module or the inventory segment, this will result in automated planning processes errors. The planning modules use averages for length of particular time to manufacture (lead times) or purchase and for quantities that are usually purchased regarding the purchase order or manufactured on a work order (usually known as lot sizes.) In case there is variability regarding the actual lot sizes produced or bought and the lead times then the planning software wont generate plans that go with what is actually happening. The whole point is that the lack of understanding and poor information on the lot sizes and lead times average impact can cause costly reimplementation and implementation failure.

ConclusionThe key to making MRP implementation work is to provide training and education for all affected employees. It is important early on to identify the key personnel whose power base will be affected by a new MRP system. These people must be among the first to be convinced of the merits of the new system so that they may buy into the plan. Key personnel must be convinced that they personally will be better served by the new system than by any alternate system. One way to improve employee acceptance of MRP systems is to adjust reward systems to reflect production and inventory management goals

Today many big/small and Mid-sized organisationsare implementing ERP solutions to manage the business plans and policies not only in efficient but also in effective manner. An ERP solution allows your organization available resources are utilized in optimum manner.In this busy world no one would like to waste their resources time on managing information in different software which can be complicated sometime both in managing and investing. So to have a single system rather than different system provides un-complications in entries for both the organization and to the employees.

In summary, ERP application can help organizations in various ways of business aspect. The common importance of ERP that can be conclude are it helps in reduction of organizations operating cost can be reduced, integrates all parts of an organization, increases the efficiency ofoperations as a result of the integration, integration on information systems which enables free flow connection of information across the organization and enables consolidation of different software within the organizations

When considering an ERP system for a manufacturing organisation the core competences and historical pedigree of the system must match your business manufacturing. Getting your hands on the software in a meaningful way prior to purchase is the best (and only) way to ensure the products suitability to your needs. If that is not an option, then speak to as many customers of the existing system as you can. Learn its strengths and its weaknesses. Maybe the weaknesses will not affect your business, but at least you will be aware of them.The best practice should be to select the best in class product for the task at hand. If, for example an ERPs accounts facility is lacking or less suited to your business then maybe a better solution is a separate MRP and account system that can interface to each other. Cost also plays an important factor E may have the lesser value than M in a game of Scrabble, but the exchange of the letters at the front of your chosen information system can have a major impact on your balance sheet without relational improvements to your business

REFERENCEShttp://www.ehow.com/info_8401517_advantages-disadvantages-mrp-ii.html

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